Fundamental Concepts

1.

UNIT 1 - Fundamental
Concepts
Economics is
the study of how we can best increase a country’s
wealth with the resources that we have available to
us.

2.

UNIT 1 - Fundamental
Concepts
Marginal Benefit
is the additional satisfaction or
value one obtains from an activity
or product.
Marginal Cost
is the additional cost or sacrifice
one makes of participating in an
activity or purchasing a product.

3.

UNIT 1 - Fundamental
Concepts
Economic Decision-Making
You decide to participate in an activity (going to
college, buying something, etc.) as long as your
marginal benefit exceeds your marginal cost.

4.

UNIT 1 - Fundamental
Concepts
The Production Possibilities Curve
A production possibilities curve represents outcome
or production combinations that can be produced
with a given amount of resources.

5.

UNIT 1 - Fundamental
Concepts
The Production Possibilities Curve
GUNS
600
500
E
C
F
B
400
G
A
300
D
350
500 580
700
ROSES

6.

UNIT 1 - Fundamental
Concepts
Economic Growth
If an economy is operating at a point on the
production possibilities curve, all resources are
used, and they are utilized as efficiently as
GUNS
possible.
600
500
E
C
F
B
400
G
A
300
D
350
500 580
700
ROSES

7.

UNIT 1 - Fundamental
Concepts
Economic Growth Is Caused by:
Increases in
Resources
Advances in
Technology

8.

UNIT 1 - Fundamental
Concepts
Your Own Personal PPC
If two possible outcomes in your own personal
life are job earnings and educational credits,
then your PPC looks as follows:
Job earnings
30000
E
C
23000
F
B
16000
G
A
12000
D
10
18
23
30
College credits

9.

UNIT 1 - Fundamental
Concepts
Economic Growth and Economic Systems
Countries with the highest overall
economic standard of living have the
freest markets (more elements of
capitalism).
Examples: Hong Kong, the United States,
Japan, Taiwan, Great Britain, Canada,
Sweden, South Korea, and Singapore.

10.

UNIT 1 - Fundamental
Concepts
2010 Purchasing Power Parity (unless otherwise
noted) Gross Domestic Product estimated in
billions of dollars, and Per Capita (person) GDP
Country/Area
GDP
Per Cap. GDP
World
United States
China
Hong Kong
Korea - North
Korea - South
Luxembourg
Qatar
$ 74,540
$ 14,660
$ 10,090
$ 326
$ 40
$ 1,459
$ 41
$ 151
$ 11,200
$ 47,200
$ 7,600
$ 45,900
$1,800
$ 30,000
$ 82,600
$ 179,000
For GDP information of other countries around the
world, see our CD, Unit 3, Section 2

11.

UNIT 1 - Fundamental
Concepts
Economies around the World
Most industrialized countries are mixed
economies, but they also have many
capitalist elements. Characteristics include
Substantial activity in the private sector
(businesses and households). Prices are
determined by demand and supply.
A significant role by federal and local
governments.

12.

UNIT 1 - Fundamental
Concepts
The Role of Government
The role of most governments around the world includes:
Spending on defense, roads, legal system,
public services and education
Redistributing incomes
through taxes and subsidies
Passing laws and imposing
regulations
Implementing price controls
Conducting monetary policy
to affect inflation,
interest rates, and employment

13.

UNIT 1 - Fundamental
Concepts
Important Concepts and Definitions
We will discuss the following concepts:
The simple circular flow
The circular flow with government and
foreign markets
Nominal and real prices and incomes
Positive and normative economic
statement
The fallacy of composition
The fallacy of cause and effect

14.

The Simple Circular Flow
Supply of Products
Purchases of (Demand for) Products
Households
Products
Market
Businesses
Supply of Labor and Resources
Purchases of (Demand for) Labor and Resources
Resource
(Inputs)
Market

15.

UNIT 1 - Fundamental
Concepts
The circular flow with government and
foreign markets (see next slide). This is a
more complex (more realistic) model.

16.

Supply of Products
Foreign
Markets
Products
Market
Purchases
of Products
Products
Services
Households
Services
Businesses
Government
Taxes
Taxes
Supply of Labor and Resources
Purchases of (Demand for) Labor and Resources
Resource
(Inputs)
Market

17.

UNIT 1 - Fundamental
Concepts
Nominal and Real Prices
Nominal prices are expressed in current
dollars.
Real prices are adjusted for inflation.
Enough money to purchase
3 gallons of gasoline a
few years ago. Not
enough to purchase 2 gallons
today.

18.

UNIT 1 - Fundamental
Concepts
Which is the Normative and Which is the Positive
Economic Statement?
Statement I: The minimum wage
should increase to $8.50.
Statement II: If the minimum wage
increases, then firms’ cost of
production rises.

19.

UNIT 1 - Fundamental
Concepts
The Fallacy of Composition
Fallacy: what is good for one person
(or one group) is good for all persons
(or all groups).

20.

UNIT 1 - Fundamental
Concepts
The Fallacy of Cause and Effect
Because A happens before B, A must be automatically
the cause of B.

21.

UNIT 1 - Fundamental
Concepts
Cause and Effect Fallacy Example
A: The car industry in country X has
not done well.
B: The economy of country X has
not done well.
Did A cause B?

22.

UNIT 1 - Fundamental
Concepts
Critical Thinking Guidelines
Question the source.
Question the assumptions.
Question how the
variables are defined.
Question the validity of
the statement.
Question the statistics.
Think like an economist.